The Investment Column : GA set to weather stormy times

The stock market has been anticipating a downturn in the insurance cycle for some time and, after last year's bumper results, shares in General Accident have marked time in 1996. But yesterday's first-half figures to June tend to support the group's own confidence that it can survive the onset of leaner times for the industry.

Stripping out realised investment gains, operating profits slid a quarter to pounds 194m. However, much of the damage was weather-related, which has not been repeated in the second three-months of the year. This improvement helps to explain the better underwriting result this year (see table), particularly in the UK, even if storms in the Mid-West of the US continued to be a drag on second-quarter results. In all, weather cost an extra pounds 56m in the half year, with US property accounts alone deteriorating by $49m.

Weather lies outside the control of the insurance industry, so more encouraging were signs that, despite increasing competition, recent rate rises are sticking. First-half increases in the personal motor businesses ranging from 4 to 6 per cent helped turn a pounds 9m underwriting loss in the first quarter into a modest pounds 1m profit in the second.

The outlook for motor also looks reasonable. Despite these rate rises, GA has put on a further 25,000 clients in the six months, taking the total to 725,000, and is experiencing an 87 per cent renewal rate in its direct operation. A further 3.5 per cent hike in commercial motor, taking the rise for the year to 9.5 per cent, should also go some way to reversing the deteriorating trend there.

More worrying are the prospects for the UK household account, where GA warned that there are few signs of any rate increases. Indeed, more competition is hitting intermediaries' commissions, if not yet rates themselves.

But the excitement in GA at the moment lies on its life side. The integration of Provident Mutual, acquired in a pounds 170m deal at the turn of the year, is going ahead faster than expected. The life assurer chipped in an unexpected pounds 5m to the latest figures, with the costs of the merger lower and savings higher than originally forecast. The group remains on the lookout for further life acquisitions in Europe.

GA has proved canny in managing its existing UK life operation. Low past payout levels mean the fund has a surplus of over pounds 1bn, at least part of which should eventually benefit shareholders.

Whether continued attempts to save costs, now to involve outsourcing all computer operations to a new IBM insurance subsidiary, will match savings from the Sun Alliance-Royal Insurance merger remains to be seen. In the meantime, the shares, up 14p at 678p, stand on a forward yield of 6.1 per cent, assuming Merrill Lynch's dividend forecast is met. A firm hold.